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Purchasing power parity: A nonlinear multivariate perspective

Author

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  • Frédérique Bec
  • Mélika Ben

    (Université Gustave Eiffel)

  • Salem Anders Rahbek

Abstract

The goal of this paper is to disentangle the respective contributions of the nominal exchange rate and the price differential to the adjustment towards the Purchasing Power Parity relation. To this end, we estimate a multivariate threshold vector equilibrium correction model, whose dynamics is consistent with the PPP in presence of trading costs. European data support the relevance of this model for Belgium, France and Italy, but this is not the case for the G7 data against the US Dollar. Furthermore, the adjustment in European countries seems to have been achieved only through nominal exchange rate changes.

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  • Frédérique Bec & Mélika Ben & Salem Anders Rahbek, 2008. "Purchasing power parity: A nonlinear multivariate perspective," Post-Print hal-04176294, HAL.
    • Handle: RePEc:hal:journl:hal-04176294
    Note: View the original document on HAL open archive server: https://hal.science/hal-04176294
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    References listed on IDEAS

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    1. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
    2. Frédérique Bec & Anders Rahbek, 2004. "Vector equilibrium correction models with non-linear discontinuous adjustments," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 628-651, December.
    3. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    4. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    5. Bec, Frederique & Guay, Alain & Guerre, Emmanuel, 2008. "Adaptive consistent unit-root tests based on autoregressive threshold model," Journal of Econometrics, Elsevier, vol. 142(1), pages 94-133, January.
    6. Saikkonen, Pentti, 2005. "Stability results for nonlinear error correction models," Journal of Econometrics, Elsevier, vol. 127(1), pages 69-81, July.
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    Cited by:

    1. Frédérique Bec & Mélika Ben Salem, 2004. "L'ajustement à seuil des processus cointégrés. Que sait-on des modèles à trois régimes ?," Revue d'économie politique, Dalloz, vol. 114(4), pages 467-488.
    2. Deokwoo Nam, 2011. "The Roles of Nominal Exchange Rate and Relative Price Adjustments in PPP Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 775-785, June.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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